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Derivatives over shares: NYSE buyout shows new trading realities

business Updated: Dec 21, 2012 23:00 IST

On a warm day in Boca Raton, Fla, the host of a reception for an annual financial conference was not a big bank or a powerful exchange as in years past, but a young firm based in Atlanta.

Guests who gathered at the oceanfront resort were surprised. They were greeted with bottled ice water that carried the company's logo, and as they left, were invited to grab iPod Shuffles.

That event, some four years ago, was the Wall Street equivalent of a coming-out party for the firm, IntercontinentalExchange, or ICE, an electronic operator of markets for derivatives and commodities. Now, the markets upstart is announcing itself to a much larger world with an $8.2-billion deal to buy the symbolic cradle of American capitalism, the New York Stock Exchange.

The takeover shows how trading in derivatives has become much more lucrative than trading in shares.

Warren E. Buffett warned in 2003 that the "derivatives genie is now well out of the bottle," and that the genie, even after a global financial crisis, was not going back. Derivatives - financial bets tied to underlying assets like oil prices or interest rates, among other things - are a $600-trillion market. Even the parent of the NYSE attracted its suitor largely because of its ownership of Liffe, a major derivatives exchange in London.

For many, the Beaux-Arts New York Stock Exchange, and images of traders looking despondent on its floor, represent what making money is all about. Yet Wall Street itself has found it more profitable to bet on fluctuations in natural gas or corn or on interest rates. The financial industry often does so electronically and through platforms in cities as scattered as London, Chicago and Atlanta. The biggest bonuses are for traders who reaped rich gains on these often complex financial products.

That change, decades in the making, has left the New York exchange, with roots going back 220 years, in an increasing difficult position as trading volumes slump and profit margins stay razor thin.